PMI Says Captive Reinsurance Passes Accounting Test For Risk Transfer Deals
The PMI Group Inc. here said a self-commissioned study found its deep cede captive reinsurance arrangements satisfy the risk transfer requirements of SFAS 113 because the probability of significant loss to the other party is more than remote.
Furthermore, the study claimed that the structures offered ceded premium levels that are reasonable in relation to the ceded risk and the structures offer reasonable risk-adjusted returns while reducing PMI's own volatility of returns.
PMI hired Milliman Inc., Seattle, to conduct the study. The results were announced on a conference call. L. Stephen Smith, president and chief executive of PMI Mortgage Insurance Co., said the company's beliefs about captives include that they align the interests of the company with its lenders on issues of loan quality, servicing and loss mitigation.
In addition, they create operational efficiencies for PMI, they are an important source of reinsurance to protect against market downturns and they are a source of capital because of the trust account structure in the agreements.
Among the findings by Milliman are that loss rates and prepayment rates are negatively correlated. This means the longer the loans were on the books, the more likely there would be higher cumulative loss ratios.
Donald P. Lofe Jr., executive vice president and chief financial officer, said approximately 10% of the scenarios generated by Milliman gave a loss outcome that resulted in a 124% present value loss ratio. Milliman believes that a 24% loss in excess of premiums demonstrates a substantial loss. PMI noted that it believes a 110% present value loss ratio meets the risk transfer criteria of SFAS 113.
In the question-and-answer session that followed the presentation, Mr. Smith was asked what if PMI pursued traditional reinsurance relationships.
He replied the product is not broadly available. PMI is aware of the potential to negotiate for it, and it believes the pricing would be very similar to what is being ceded in the captive arrangements.
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